Powell's Congressional Hearing Next Day: Tariffs Are Unprecedented, Impact on Inflation Is Uncertain, Trade Agreement May Lead the Fed to Consider Rate Cuts

Powell stated that the U.S. economy is very strong, the current high tariffs have no modern precedent, and their impact on inflation may be larger or smaller than expected, therefore the Federal Reserve (FED) is not in a hurry to act.

Written by: Li Dan

Source: Wall Street Insight

The day after a "special" congressional hearing on The Federal Reserve (FED) monetary policy, FED Chairman Powell reiterated the outlook for interest rate cuts. He restated that there is no rush to cut rates, emphasized that high tariffs create significant uncertainty, pointed out that the U.S. economy is very strong, and stated that there is reason to proceed slowly in uncertain conditions, while also mentioning some factors that could drive interest rate cuts.

At the hearing of the U.S. Senate Committee on Banking, Housing, and Urban Affairs held on Wednesday, June 25, Eastern Time, Powell told lawmakers that future trade agreements may allow the Federal Reserve (FED) to consider lowering interest rates.

Regarding the policies of the Trump administration, Powell stated that the economic projections (SEP) updated after last week's Federal Reserve meeting reflected, to some extent, the impact of trade policies. However, the tariffs are very high, and such high tariffs have no precedent, making it difficult to predict how tariffs will affect inflation. During periods of uncertainty, it is reasonable to proceed with monetary policy more slowly.

Regarding inflation, Powell stated that stagflation is not a fundamental scenario for the U.S. economy, but the Federal Reserve (FED) is monitoring prices in the United States. Over time, regulation will also contribute to a slowdown in inflation.

Current high tariffs have no modern precedent, and their impact on inflation will become apparent in the coming months.

Powell stated during his testimony that due to a lack of historical experience, Federal Reserve officials find it difficult to assess the potential impact of the Trump administration's trade policies. "There is a lack of modern experience in this regard. The scale of tariffs during President Trump's first term was only one-sixth of what it is now."

It is precisely due to the lack of precedent that the Federal Reserve currently feels uncertain about making any policy adjustments. Powell said:

"One reason this is so challenging is that there is no modern precedent, and we must remain humble in our estimates. The impact of inflation transmission may be larger or smaller than we imagine, which is why we are not rushing to act."

Powell said that the Federal Reserve is waiting to see who will ultimately bear most of the tariffs and how the tariffs will be reflected in measured inflation.

Powell believes that the tariffs implemented by the Trump administration may raise inflation in the coming months.

Powell said that reasonable expectations are that tariffs will cause a certain degree of inflation. He stated that most Federal Reserve (FED) officials support interest rate cuts this year, and the FED wants to observe changes in inflation over the next few months.

"Tariffs will bring some inflation. It is not present yet, but will be evident in the coming months."

Consumers may have to bear some tariffs, and it is difficult to predict in advance. The Federal Reserve (FED) is still working to determine the impact and is waiting for more data.

During a hearing in the House of Representatives this Tuesday, Powell stated that the data shows that at least some tariffs will be borne by consumers. At that time, he said that initially, it is the importers who pay for the tariffs. However, over time, there will be five different participants who will bear the costs: manufacturers, exporters, retailers, and consumers.

This Wednesday, Powell stated again that the Federal Reserve (FED) is still working to determine the impact of tariffs on consumer prices. He said:

"The question is, who will pay for these tariffs? How much of it will be reflected in inflation? To be honest, it's hard to predict in advance."

Powell believes that consumers may need to bear some of the costs of import tariffs. He pointed out that tariffs could lead to losses of hundreds of billions of dollars each year, "a portion of which will be borne by consumers. We are just waiting for more relevant data."

Some Republican senators criticized Powell, characterizing tariffs as potential drivers of inflation. Among them, Senator Pete Ricketts believes that tariffs may only cause a one-time price increase and will not exacerbate inflation.

Another congressman, Bernie Moreno, accused Powell of political bias, saying, "You should consider whether you are looking at this issue from a fiscal or political perspective, because you simply don't like tariffs." Powell did not respond.

However, Powell reiterated that most Federal Reserve (FED) officials do support a rate cut this year. He went on to say that tariffs may not significantly drive up inflation.

During the House hearing on Tuesday, Powell mentioned that the impact of tariffs on inflation might be less than expected. When asked about the possibility of a rate cut in July, Powell said that "many paths are possible," and that inflation might not be as strong as expected. The decline in inflation and a weak labor market could mean an earlier rate cut.

Rarely Touching on Fiscal Issues: Congress Seems to Need to Consider Student Loan Debt

Powell has previously stated multiple times that the fiscal path of the U.S. government is unsustainable when describing the fiscal deficit. He has said that the growth of U.S. debt exceeds the growth rate of the economy, and therefore it is unsustainable. In this hearing, Powell mentioned government debt again.

Powell said that the debt issue of the U.S. federal government will not be considered in the monetary policy decisions of the Federal Reserve's Federal Open Market Committee (FOMC). Fiscal policy can exacerbate inflationary pressures, but the Federal Reserve will not comment on this risk. The scale of U.S. debt has not affected the Federal Reserve's fulfillment of its responsibilities.

Powell typically avoids commenting on fiscal policy. However, during the hearing this Wednesday, he made a rare "exception" when discussing student loans.

Powell stated that student loan debt "seems to be an issue that Congress needs to consider." Such debt can negatively impact borrowers' ability to fully participate in economic activities, which in turn hampers the overall economy.

Powell said: "You can make various investments, and if you are unable to repay the loan, you can discharge it through bankruptcy. The only exception is student loans. I want to ask, is this a wise national policy? Those who borrow money to invest in education, we do not discharge (repayment)."

The U.S. Treasury market is performing well, liquidity is appropriate, and the dollar remains the global reserve currency.

Speaking about the U.S. bond market, Powell stated that the bond market is performing well now, functioning normally, operating smoothly, and liquidity is appropriate.

Powell believes that the US dollar remains the global reserve currency. He does not have an opinion on whether the dollar is overvalued, but mentions that some believe the dollar is overvalued.

At the hearing in the House of Representatives this Tuesday, Powell defended the global status of the dollar, stating that the dollar remains the number one safe-haven currency, and the fluctuations in the U.S. Treasury market in April did not undermine this status of the dollar.

The cancellation of the reserve interest payment mechanism will not save banks money

Powell stated that even if the mechanism for banks to receive interest on reserves deposited with the Federal Reserve is abolished, it would not save money for banks, and restoring the scarce reserves system would be challenging and could lead to market volatility.

Powell mentioned the proposal to abolish the interest payment mechanism on bank reserves, stating, "People fantasize that doing so will save money, but that's not the case." "If we want to return to an era of scarce reserves, it will be a long, bumpy, and turbulent road. I do not recommend that we take this path. Ample reserves mean ample liquidity, which means banks can continue to lend."

The U.S. Congress approved the above mechanism before 2006, and the Federal Reserve began paying interest on reserves held at commercial banks. Subsequently, one of the policy interest rates for the Federal Reserve to control short-term rates was born - the Interest on Excess Reserves (IORB), also known as the Reserve Balance Rate. IORB acts as the upper limit of the Federal Reserve's interest rate corridor, while the Overnight Reverse Repurchase Agreement (ON RRP) serves as the lower limit of the interest rate corridor.

The report on the Federal Reserve headquarters renovation costing $2.5 billion is highly provocative.

In recent months, media reports have indicated that the renovation of the Marriner S. Eccles headquarters building of The Federal Reserve (FED) in Washington, D.C. is expected to cost around $2.5 billion. As a result, the FED is facing pressure from external criticism. Elon Musk, who previously led the Department of Government Efficiency (DOGE), specifically mentioned this project, stating, "We absolutely should see if the FED spent $2.5 billion hiring an interior designer. It's really surprising."

At the hearing this Wednesday, a congressman questioned the aforementioned renovation plan. Powell stated that the Federal Reserve (FED) "takes seriously the responsibility of managing public funds, and no one is willing to renovate a historic building." He also mentioned that the headquarters building is neither safe nor waterproof and needs renovation, which can be left to his successor.

According to media reports, the early plans for the Marriner S. Eccles building included a rooftop garden, water features, and an upgraded executive dining room. Powell stated at the hearing on Wednesday that these reports are inaccurate and are all sensationalist.

Powell said, "All the incendiary content reported by the media is not in the current plan. No VIP restaurant, no new marble, no private elevator. No new water features, no honeycombs, and no rooftop terrace gardens."